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MARKET OUTLOOK: Europe and Asia

polymer outlook

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23 March 2016 21:21

Source: ICIS Chemical Business

The next few years are expected to see an explosion of polymer capacity added
globally, especially for polyethylene (/chemicals/polyethylene/) (PE). This is
within a context of lower oil prices, a shaky global economy and a new player on
the block, in the form of Iran. As a result, the market is asking where will all the
product go and what will this mean in terms of pricing and margins?

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NAPHTHA (/energy/naphtha/) RESURGENCE

The Asian naphtha cracker business was supposed to be pretty much dead on

This, of course, put downward pressure on margins as a result of high naphtha

How do market
moves impact
prices?

costs. The situation became even worse when co-product credits declined,

ICIS oers independent and

its feet a few years ago, as the consensus view was that oil prices in the region
of $100/bbl were here to stay.

following the collapse of butadiene prices.

reliable pricing and market

On the horizon was also the
start-up of huge amounts of
new US ethane-based PE
capacity. For instance, in the
case of high-density PE
(HDPE):
US capacity will rise from
7.2m tonne/year in 2016 to
10.4m tonnes/year in 2025,
according to ICIS Consulting.
This will result in exports
rising from around 700,000

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tonnes in 2016 to 2.3m

tonnes in 2025, based on
our estimates of local
consumption and operating
rates.
Increases in low-density and linear-low density capacities will also take place
from 2017.
Ethane (/energy/ethane/) costs in the US are not tied to oil prices. And so when
oil prices were at recent historic highs, this greatly widened the advantages of
cracking US ethane over cracking ethane anywhere in the world.

The monthly global

ICIS Petrochemical
Index (IPEX)
(/contact/requestfree-monthly-ipex/)
Published at the
beginning of each month, the
global IPEX provides a capacity-

But how times have changed, which we have monitored very closely in our

weighted measure of the average

Asian, European and US PE price forecast reports

change in petrochemical prices

www.icis.com/chemicals/channel-info-about/price-forecast-reports.

over time.

In the case of northeast Asia, for instance, the charts show the tremendous

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improvement in naphtha-based margins since 2014:

free-monthly-ipex/)

In Asia in both our PE and

also PP monthly forecast
reports we have made the
right calls on the retreat in
oil prices and the slowdown
in the Chinese economy. We
are among the few
companies to predict both
of these events, and to
explain how they were
linked. We believe that
pricing will have to fall on
weaker crude and that
margins will also weaken.
But PE margins will not
collapse in Asia. They will
instead remain above their
historic averages.
Our argument for weaker margins over the next 12 months is demand, rather
than supply, driven. The macroeconomic environment is going to remain
incredibly challenging as the global economy struggles to deal with major debt
and deation challenges. We have helped lead the way in agging up these
risks.
But from H2 2017 when all that new US PE capacity hits the global market
extra supply will of course also become a major issue.
Along with the surge in new US capacity, there is one other important supply
trend that we closely monitor in our Asian reports: how much more PE and PP
capacity China decides to add during its 13th Five-Year-Plan, which runs from
2016 until 2020.
It would be wrong to see this as purely a commercial decision by China, as the
country has never built petrochemicals plants for the purpose of only making
money. Chinas reason for becoming more self-sucient up and down many of
the petrochemicals value chains has instead been heavily tied to creating
employment in downstream manufacturing facilities.
Now, of course, manufacturing jobs are under threat as a result of the
economic slowdown and so why shouldnt China build even more
petrochemicals plants? Many of these new plants could be coal (/energy/coal/)
based, as this is where China has a feedstock advantage.
European polyolens to tighten on supply outages
European polyethylene (PE) and polypropylene (/chemicals/polypropylene/) (PP)
buyers may have to prepare for another dicult period, reminiscent of the
exceptional supply issues seen last year.

There are already a number of factors pointing to a reduction in product

availability over the next few months, the most obvious and worrying perhaps
being the temporary shutdown of an important number of plants.
In March, LyondellBasell will
u ndergo a 45-day maintenance turnaround that
will aect a 350,000 tonne/year PP unit and a 320,000 tonne/year low density PE
(LDPE) unit in France. Similarly, INEOS may shutdown capacity in Belgium,
including 440,000 tonnes/year of high density PE (HDPE) and 400,000
tonnes/year of PP for four to six weeks from May, although this has not yet
been conrmed. Total has a planned maintenance outage at its Antwerp
cracker, which may aect PE and PP capacity as well.
There are also some unexpected problems. Versalis LDPE units in Italy have
been under force majeure (FM) restrictions; its Ragusa plant since mid-January
and its Ferrara plant since early February. In central Europe, Unipetrols PE and
PP plants at Litvinov, in the Czech Republic, will run below 60-65% of capacity
until July at least.

MIDDLE EAST SWITCH

At the same time, market participants foresee a possible reduction of deliveries
from the Middle East as producers start moving larger volumes to China, where
demand is expected to pick up in March after the Lunar New Year holiday
break.
When balancing supply and demand, tightness looks like a real possibility in
Europe from March and during the second quarter, with PP and LDPE being the
most exposed. Nonetheless, projections by ICIS Consulting head towards a
relief in supply conditions by mid-year.
The reasons are quite simple: global supply will grow stronger than demand,
especially in the case of PE, and Europe will continue to oer substantial
netbacks to polyolen producers for some months yet, which will attract
imports.
The scale-up of new plants in the Middle East, including the 1.43m tonne/year
PE capacity of Borouge 3 at Ruwais, Abu Dhabi, and the 1.32m tonne/year plant
recently launched by Sadara at Jubail, Saudi Arabia, will have a huge impact on
global PE markets. Supply will also increase from North America, with the startup of Braskem-IDESAs Ethylene (/chemicals/ethylene/) XXI project in
Coatzacoalcos, Mexico, adding 1.05m tonnes/year of PE capacity.
Other projects scheduled to start-up this year include Nova Chemicals 454,000
tonne/year linear low density (LLDPE) plant at Jore, Canada, and in India,
BPCLs 220,000 tonne/year HDPE/LLDPE unit in Assam and OPals second
360,000 tonne/year LLDPE line at Dahej.
PP production will also increase, with the ramp-up of Borouge 3, and from the
start-up of a number of units in China totalling at least 1.15m tonnes/year of
new capacity. It is worth noting that most of the Chinese units planned to start
up this year were originally scheduled to commence operations in 2015.
Yet, the global PP market may prove to be tighter than PEs, especially if
demand in China and southeast Asia reaches reasonable growth, and if any
projects are postponed again.

The other signicant factor aecting markets this year is the end of UN-imposed
sanctions on Iran. Petrochemical suppliers in the country are already moving to
re-establish business connections with Europe, so they can divert cargoes away
from China if the countrys demand prospects remain weak.
IRAN FACTOR
The lifting of sanctions will speed-up polymer investments in Iran, where new
PE capacity was already scheduled to go on-stream this year. Mahabad
Petrochemicals 300,000 tonne/year HDPE/LLDPE swing capacity was close to
completion by the end of 2015, and a 300,000 tonne/year LDPE project by
Kordestan Petrochemical at Sanandaj could enter production during the second
half of 2016.

High prices and good margins will attract imports into Europe, and it is
reasonable to expect that producers margins will reduce, pressured by
competition in the PE market in particular.
Does it mean that prices will inevitably soften? Not necessarily. That depends
on raw material costs, which we believe could push PE and PP prices up
gradually during the year.
It is also unlikely that the protability of the polyolens business in western
Europe will be disrupted. Far from it, suppliers will probably retain a signicant
portion of the PE and PP price spreads over their respective monomers, at least
in the short-term, unless unpredictable events shake the oil market.
International sellers will continue to target large-volume buyers in southeast
Asia and China, and in other destinations such as Turkey, Africa, and south and
central America.

In addition, technical barriers to some markets exist in western Europe, where

product speci-cation and quality remain a must for many PE and PP buyers,
thereby reducing the feasibility of using imports in some instances.
By John Richardson (mailto:icisnews.asia@icis.com)

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